Last month we reported the changes that CIS, VAT registered contractors and sub-contractors were about to face with the introduction of the “reverse charge” process from 1 October 2019.

Shortly after our newsletter was published, HMRC conceded that it was aware that the industry was struggling to adapt to the new rules and, as Brexit is also looming large this month, HMRC has agreed to defer the change until 1 October 2020.

This is a triumph for the construction industry lobby groups who have pushed hard to have this VAT change delayed.

Just in case you missed our alert on this topic last month the nuts and bolts of the reverse charge process for VAT registered businesses who are subject to HMRC’s Construction Industry Scheme, are:

From the 1 October 2020, you may need to change the way you account for VAT on supplies between sub-contractors and their contractor customers.

At present, sub-contractors registered for VAT are required to charge VAT on their supplies of building services to contractors. From 1 October 2020, this approach is changing.

From this date, sub-contractors will not add VAT to their supplies to most building customers, instead, contractors will be obliged to pay the deemed output VAT on behalf of their registered sub-contractor suppliers.

This does not mean that contractors, in most cases, are paying their sub-contractors’ VAT as an additional cost.

When contractors pay their sub-contractors’ VAT to HMRC, they can claim back an equivalent amount as VAT input tax; subject to the usual VAT rules. Accordingly, the two amounts off-set each other.

The change is described as the Domestic Reverse Charge for the construction industry. It has been introduced as an increasing number of sub-contractors have been registering for VAT, collecting the VAT from their customers, and then disappearing without paying the VAT collected to HMRC.

Affected contractors now have a year to make the appropriate changes.

If by chance you have already made changes to your account’s software and invoicing processes, you will need to reverse the process and moth-ball the changes for twelve months.

The following guidelines are reproduced from the government’s website:

You must send a tax return if, in the last tax year (6 April to 5 April), you were:

• self-employed as a ‘sole trader’ and earned more than £1,000
• a partner in a business partnership

You will not usually need to send a return if your only income is from your wages or pension. But you may need to send one if you have any other untaxed income, such as:

• money from renting out a property
• tips and commission
• income from savings, investments and dividends
• foreign income

Other reasons for sending a return

You can choose to fill in a tax return to:

• claim some Income Tax reliefs
• prove you’re self-employed, for example to claim Tax-Free Childcare or Maternity Allowance

If your income (or your partner’s, if you have one) was over £50,000, you may need to send a return and pay the High Income Child Benefit Charge.

Unfortunately, this is just the tip of the iceberg. For example, you may have to submit a return if you have made significant capital gains in a tax year.

If you are at all uncertain if you do need to file, please call. There are significant penalties for failing to register and submit a return. The deadline to register for the tax year 2018-19 is imminent, 5 October 2019, and so action should not be delayed.

If your circumstances have only recently changed – during the current 2019-20 tax year – you have more time, but it is worth getting the registration process completed so you can start to plan for any tax payments that may fall due 2020 and beyond.

If your business makes a trading loss its ability to survive the loss will depend on a number of issues. They include:

• Did your business have sufficient reserves to absorb the loss?
• If not, are the business owners able to introduce new capital to cover the losses? Or,
• Are the business bankers willing to step in and support the business with additional funding?

In all cases, due regard will need to be made to the reasons for the loss and how likely it may be that the losses will continue.

Clearly, planning for the management of losses is critical; digging into the reasons for the loss may reveal that the company has little chance of re-establishing profits or that the loss was occasioned by temporary factors and a clear path back to profitability can be reasonably expected.

Tax planning for the use of losses is also a factor that needs to be considered. Can losses be utilised in such a way that refunds of previously paid tax can be recovered?

Whilst this may only produce modest refunds for companies, corporation tax rates are below 20%, self-employed business owners – particularly those who have paid income tax at the higher rates of 40% or 45% – may be able to recover significant cash refunds to offset the effects of qualifying trading losses.

Again, planning is critical to ensure that any claims for loss relief are not lost. For example, there are annual limits to the amount of certain reliefs that can be claimed and the self-employed must take care that loss claims do not result in a waste of personal tax allowances.

If your management accounts reveal that your business is making losses, please contact us sooner rather than later so we can help you develop strategies to minimise the down-side effects on your business.